Maybe it’s the desire to keep getting better or simply jumpiness, but traders are always looking for that new magic bullet strategy. Whether you deal in forex or cryptocurrencies, trying new approaches is always on the to-do list. But it isn’t always possible to test a new trading strategy without typically losing substantial sums of hard-earned money.

This is exactly what prediction platforms want to change. Decentralized, blockchain based platforms give individuals fun ways to research and apply their insights to their predictions, test new strategies, and take part in fantasy trading competitions against fellow traders. On some platforms players create fictional portfolios, where the consequences of their trading decisions are decided based on real-time market data. On others, they simply join prediction platforms on any type of subject imaginable. On all platforms the winners walk away with cryptocurrency, ERC20 tokens that can then be traded on exchanges for reach cash.

Seems too good to be true? It’s not. They’re out there, and there are some huge benefits to exploring them. Namely…

Lower fees and no commissions

When it comes to trading forex, stocks or even cryptocurrencies, every trader knows that you always lose some money in the form of fees and commissions. It is simply the cost of doing business in the markets. What stings is when you’re still testing a trading strategy, the efficacy of which you’re still not sure about – and end up paying the fees over and over again.

Fantasy trading markets and prediction markets on the other hand – generally allow you to eliminate the fees that are involved in trading. With no brokers or intermediaries to arbitrate interactions with the platform, players simply remit a certain amount of their tokens to enter competitions and trade, experiment or predict almost endlessly, while top performers earn back tokens in the form of winnings.

This low, often no-fee structure allows the novice and the experienced trader alike to battle test their skills and hone their insights for the real markets.

A level playing field

When it comes to forex especially, the current trading scenario makes it very hard for the small guy to make money. The competition is just too stiff and the information gap too significant. For example, retail brokerages have the ability to collate pricing information from different banks and similar liquidity providers. Individual traders do not get the same access to better spreads and trading flow insights.

Fantasy trading platforms make the field more equitable by creating all competitions in peer-vs-peer format. This means that it is always individuals who end up competing against each other (as opposed to institutional traders), making it an apt environment in which to play and potentially earn – without the unfair advantages seen in other markets.

A trustless environment

Trust makes the forex trading world go round. Without trust, we wouldn’t be giving our money to brokers who then give our money to exchanges. It’s because we trust the system that we calculate profits from trading each month even before the amount has made it to our bank accounts.

But there’s also a downside to relying so much on trustworthy intermediaries. Sometimes, brokers are unable to pay on time. Or scenarios arise where brokers or intermediaries simply cannot repay funds.

In these scenarios a trustless environment is ideal. Fantasy trading and prediction platforms that are based on the blockchain rely instead on smart contracts. Smart contracts are coded to decide what transactions need to be executed when – and under what circumstances.

With this type of system competitors are always assured of receiving their payout – as it’s built directly into the blockchain. A competitor no longer has to rely on the trust of an intermediary, but can instead rely on the trust of the technology – whereby steadfast rules are established and applied, and the technology inherently provides payment security.

While various prediction platforms exist online, it’s up to the individual to decide how and what they would like to engage in. From fun prediction games like Augur, to cryptocurrency predictions and fantasy forex trading markets like ZeroSum – the platform is out there for those who want to experiment, learn, compete and earn.

Notice that the first transaction date was in January 2017. I originally purchased those coins through an exchange called Coinsetter. That business was purchased by Kraken, but it wasn’t until about a year later that I grew paranoid enough to take over complete security of my coins.

Bitcoin’s main purpose is to eliminate the need to trust a 3rd party like a broker. Once I grew comfortable using wallets (I recommend Electrum) and especially the idea of cold storage, I finally put my investment completely into the blockchain.

Did I really turn $1,000 into $36,000?

A Big Enough Win

I sold my bitcoin last week at an average price $9,775. It looks like my final profits will total around $28,785.35. Doesn’t that seem oddly precise for an estimate?

So far, I’ve withdrawn $19,727.17 into my bank account with $9,058.18 in cash stuck at the exchange.

The money remaining to withdraw from Kraken

Because of an inexplicable hangup verifying my identity, I’m limited to withdrawing $5,000 in cryptocurrencies per day from Kraken. Ok, so I withdraw crypto from Kraken to where exactly?

In order to turn paper profits into actual dollars, I have to transfer some form of crypto into Coinbase. Coinbase is where I did successfully verify my identity. It’s not ideal because they charge a massive spread of nearly 5% of the value. I want to get my money out and that’s my only method. You just suck it up and pay the fee. At Kraken, the spread cost of Ethereum is around 0.25%.

My super convoluted process of getting the cash out is:

Turn the cash at Kraken back into crypto so that I can transfer the value to Coinbase. That means buying Ethereum because it has the fastest confirmation time.

Jump through a number of Kraken pages to submit a withdrawal request

Wait for Kraken to send the withdrawal

Wait for Coinbase to see and credit the Ethereum transfer to my account

Sell the Ethereum at Coinbase by paying a massively marked up spread.

Wait another day for dollars to show up in my bank account

Transfers from Kraken

Transfers to Coinbase

The reason I’ll wind up with about $28,000 in profit instead of ~$36,000 is that I decided to diversify across different cryptocurrencies in the summer. Monero was a huge win for me (bought around $75, sold for $297). Ripple, Stellar Lumens and Ethereum significantly underperformed bitcoin. Whenever I re-enter the cryptocurrency space again, I will do so across multiple assets. What I won’t replicate is diversifying amidst mania. That needs to happen when the markets are totally boring. I underperformed my target because I made a bad decision.

Last week, I went ahead and sold all of my bitcoin as the price approached $10,000. My average exit price was $9,975.

I confess to a small bit of “if would’ve been nice if I hung on longer”. But when I look at the charts, there is 0% chance I would have held on until today. And, there’s noooooo way I’d hold it over the weekend.

I’ve seen many parabolic markets before. I never time the top – it’s best to get out when you already have a massive win locked up. The way I make money is on the entries, by purchasing things when they’re quiet and boring.

The best counter example is from back in 2009. I caught the monster move in the silver ETF (SLV) when it traded in the high 20’s. Instead of buying the ETF, I started buying slightly out of the money calls.

As my out of the money calls became at the money calls, I would sell that strike and roll it into a higher strike. Rinse and repeat.

Soon, my $1,000 punt was up to $6,000. The market was absolutely insane. I knew it was crazy. I knew it was parabolic. But, I was afraid of missing out on even more profit. And so, I put stuck my head where the sun don’t shine and watched up profits evaporate.

Do you know where I finished that silver trade? $800!!! I lost money on a trade that had earned over $5,000.

That will not happen to me again!!!

This current bitcion craze is driven by the CBOE launching bitcoin futures on Sunday. In my opinion, this is an extreme case of buy the rumor, sell the news. So much can go wrong on the futures launch.

The futures market brings phenomenal quantities of capital into the market. Most professionals will not buy breakouts. The near universal consensus is that bitcoin futures supports the bullish case. As a dedicated contrarian, I predict that it’s profoundly bearish simple because everyone is so confident about the bullish case.

Many of the spot exchanges offer leverage. What if there’s a massive panic and liquidity evaporates FXCM style? Leverage + Volatility leads to bankrupt businesses. If your money gets locked up in a bankruptcy proceeding, you won’t see that money for years. And when you do, it’ll be pennies on the dollar.

People always hope to trade the top. But, you know what’s common with tops? Liquidity is super thin. Most of the depth of market on Kraken’s bitcoin is only worth a few thousand dollars deep. Even a small fish like me with 28k would sweep most of the order book. It’s completely unrealistic to expect a decent fill in fast market conditions.

100% of the coin exchanges are overwhelmed by the traffic. I see this “trading screen of death” more often than I’m able to log in to my Kraken account.

The trader’s death screen. “We know the markets are volatile, but our network engineering doesn’t support spinning up new servers when needed. Oops”

The uber-bullishness extrapolates that leverage from the futures market goes into the bullish case. What happens if one of the large prop trading firms applies a few billion in capital to smashing down the price? Joe Retail in the US and Ms. Watanbe in Japan will puke their positions. This 4 year run-up in the price will crash with breathtaking speed if the institutional money comes in bearish.

Converting crypto into fiat currency is a massive pain. Exchanges like Kraken have the absolute worst customer service in the world. I wasn’t able to complete a withdraw order yesterday because I had a limit order to sell the handful of ethereum in my account and forgot about the order. When I tried to transfer ethereum into Coinbase, Kraken gave me the error message “Insufficient funds”. WTF? I had nearly $15,000 in the account at the time. Customer Disservice takes WEEKS to reply to questions if they reply at all. The only reason I was able to resume withdrawals is that I remembered that the pending order tied up my unused margin. Otherwise, I’d be sweating bullets again this morning wondering how to get my money out.

The fear of missing out on another 25k in profits could have kept me in the market. But I wanted to write this as a trading journal entry to document that I am honestly and truly happy with the outcomes of my cryptotrades. It could’ve been better, but losing $20,000 sounds twice as bad to me as making $20,000. I’d rather use that money to retire 100% of my non-mortgage debt and fund my next punt: long May VIX futures.

As a relative newcomer to the trading scene, your eagerness to get started may overwhelm your better judgment. There are several questions you need to ask yourself before you start trading, including the following:

Which trading platform are you going to be using?

Which financial assets are you going to be trading?

What affects the market prices of your chosen assets?

What trading budget are you going to be working with?

What resources can assist in your trading activity?

Of course, there are many other questions that you will need to consider when you begin trading.

The trading platform of your choice should be one that is credible, offers transparency, and low spreads. Whether you are trading CFDs (commodities, currencies, indices, stocks or treasuries) or Forex, you will always want to work with a regulated brokerage that offers you recourse in the event of nonpayment, anomalies, or problems. The trading platform you choose should be fully registered, licensed and regulated to offer real money trading in your jurisdiction.

Trade with a Licensed and Regulated Broker

Many operators currently offer their services beyond their jurisdiction. If you’re going to be investing your hard-earned money with a trading platform, ensure that they have FCA (Financial Conduct Authority) licensing, CySEC (Cyprus Securities Exchange Commission) licensing and regulation, ASIC, or other reputable licensing.

If possible, it is always preferable to use a brokerage that offers you demo trading options. When you trade on a demo account, the broker typically provides practice trading funds which you can use to test your trading tactics and strategies on your chosen assets. On the topic of assets, you will want to pay attention to where you invest your money.

Stocks, commodities, indices, currencies or cryptocurrency are all available to you when you trade from home. It is not necessary to frequent land-based brokers to invest your funds in financial assets. Mobile trading options provide maximum convenience, cost-effectiveness, and variety. Expert traders recommend that you pick a financial asset that you understand such as a currency, a commodity, an index or a stock. Examples include the USD, GBP, or EUR, gold, silver, the FTSE 100 index, Google, Twitter, Amazon etc.

Allocating a Budget to Trading Activity

The precise allocation of funds towards each financial asset depends on your available budget. Never trade with more money than you have available in your bankroll. Financial trading gurus advise novices and intermediate-level traders to use specific credit cards or debit cards for trading purposes. That way, you will not mix household expenses with trading expenses, and you will be able to keep a close tab on your budget allocation towards your trading endeavours.

On the topic of budget allocations, it is preferable to limit each trade to know more than 1% of your available bankroll. As you become more adept at trading, you may be able to increase that allocation to 2% of your available bankroll. Be advised that budgetary constraints are necessary to protect you from sudden market changes. Volatility is an inherent component of financial markets, and the only way to protect your investment is by spreading it across as many different trades as possible.

Use trading resources to assist you

As a newbie trader, or an intermediate-level trader you can always benefit from the know-how of experienced traders. It’s not only about what you trade, or how you trade; it’s also about reading macroeconomic variables such as interest rates, nonfarm payroll data, gross domestic product, inflation rates, changes to monetary or fiscal policy etc. Experienced traders know which assets and asset categories are likely to move given an imminent economic data release. Pay attention to speculative activity, notably shifting capital from equities to commodities (from stocks to gold or Bitcoin) as this could signal the beginning of a reversal.

Trading at home, being your own boss, having real financial freedom. That’s why most people get involved with forex.

The average trader has less than $5,000 in his account. You’re thinking that you need to make well above 100% annual returns for YEARS before trading could possibly provide an income to live off of.

How are you going to make it big?

You are setting the bar WAY too high. You don’t need to shoot for returns of a million bajillion percent per year to make a lot of money. Most institutional investors would kill for 20% a year.

How can I amplify my 20% annual returns?

Let’s do some simple math. You make 20% per year on your $5,000 trading account. That’s a profit of $1,000.

But, I said you could make a 140% return on your trading account. If you have an account with $5,000 in it, that’s a total profit of $7,000. You start the year with $5,000. You finish the year with $12,000.

So far, I’ve only calculated the first $1,000 of profit. Where’s the remaining $6,000? Where is that coming from?

You trade other people’s money to increase your own profit.

Say that you’re like Amir Samih from Egypt and that you received an allocation of $120,000. You earn 20% annually on the allocation, of which you get to keep 25%.

$120,000 * 20% annual return = $24,000 annually
You get to keep 25% of $24,000, which is $6,000.

You make $1,000 trading your own money. You make $6,000 trading the allocation.

Voila – you make $7,000 a year in profit with only $5,000 in your account. $5,000 becomes $12,000 in only one year. A 20% annual return magnifies 7x by having investors.

How am I going to get an investor?

Not the way you’re thinking. Trading money for other people is a highly regulated industry. In the United States, for example, you have to register with the NFA. In Europe, you have to follow MiFID II regulations. All of this requres a serious time commitment to find people willing to invest in your trading skills.

Even worse, you would have to raise at least $10 million dollars to offset your regulatory costs. That’s totally out of reach for most people.

You don’t need to shoot for returns of a million bajillion percent per year to make a lot of money.

The best way for you, the stay at home trader, to raise money is by signing up for free with TopTradr. TopTradr is a specialized proprietary trading firm that discovers hidden talent and backs that talent with its own money.

It’s a pure meritocracy. You don’t need to do any sales or marketing. You don’t need to meet any education or experience requirements. You’ll never be asked for a CV.

Trade well, make a profit and you’ll earn points on Top Tradr. The more points you earn and the longer your track record, the more money you’ll be able to receive and apply towards trading.

How are points awarded?

The exact formula is not publicly shared to avoid traders trying to game the system. That said, the allocation rules are very straight forward. You need to be profitable. You need to be consistent.

Here are some specifics on how to maximize your chances of winning an allocation.

You need to be positive on the period to have a score above 100.

For each trade you get points based on the % returns of the trade and the risk / reward of that trade. If the drawdown is 10pts and you get 100pts out of the trade, you get a lot of points. If you get 100pts but have 500pts of drawdown, the trade will score much lower.

The sum of your points is then factored by the consistency of your daily equity growth. If you are up one day 10% then down 20% then up 30% and are not consistent, this factor will be low. If you do 2% every month, then this factor will be sky high.

Does this cost money?

No. The program is 100% free to participate. In order for TopTradr to find talented traders, the service must always remain open to the general public free of charge.

How do I participate?

Sign up using the form below. You will create a TopTradr profile and receive instructions for how to hook your live forex trading account up to TopTradr. Everything after that is completely automatic. TopTradr watches your live trading and assigns you points. When you earn enough points, you receive automatic allocations every 2 weeks. When you earn a profit, you receive 25% of the total profit once per quarter.

Are you ready to magnify your returns by trading TopTradr’s money? Click here to get started.

What is the basic distinction between a professional trader and an amateur? Money!

It’s tempting to make the professional-amateur distinction more complicated than it needs to be. Professional brings to mind ideas like sophisticated strategies, hedge funds and private jets. When you boil the essence of a pro to its core, it’s really about the amount of money that you have available to trade.

The average retail forex trader has $5,000 in his account. But even that is misleading. The median account size is only $2,000. For every 15 traders with $1,000 in their accounts, there’s maybe 1 guy with more than $25,000 in his account. Barring miraculous returns, there’s almost no chance of the typical retail forex trader to get to a professional level only through profits in the market.

The fastest way to trade at a professional level is to trade for other people. Even that can be very complicated. There’s licensing. There’s regulation. There’s the hassle of dealing with customers.

It costs nothing to sign up. Just do your thing. When you’re successful, you’re eligible to receive an allocation from TopTradr.

How much money can I manage?

Everything at Top Tradr is a meritocracy. Do a great job trading and you’ll get an allocation in line with your talent.

Amir Samih lives in Egypt where the average annual income is less than $6,000. Unemployment among men is a major social problem and runs at 8.5%. But it’s even worse when you consider the types of jobs available. Many work in limited opportunity sectors like agriculture or tourism. There aren’t many jobs. The jobs that are available generally suck.

Amir overcame these challenges to earn himself an allocation of $120,000 from TopTradr.

As a trader with a 25% profit share, how far do you think that goes to giving him a great quality of life?

How TopTradr Can Make You A Professional Trader

Your one and only job is to make a profit in the forex market. Your trading style isn’t important to TopTradr.

Profits gets you points at TopTradr. And, more to the point, how you profit gets you points.

TopTradr is looking for traders who are consistently profitable and utilize a low amount of leverage. Use stop losses on every trade. Avoid high-risk strategies like Martingale (i.e., you need to have an opinion on the market). It’s all common sense to anyone that’s traded for a few months.

After you earn a profit, you get paid 25% of the profits on a quarterly basis. There are no fees to sign up and no hidden charges.

Amir overcame these challenges to earn himself an allocation of $120,000 from TopTradr.

Once your profits start accruing in your STO account, you’ll automatically earn points with TopTradr. Points and consistent profits will lead to an automatic allocation from TopTradr of at least $10,000.

How often will TopTradr pay out a profit share?

A 25% performance fee will be paid to you quarterly when you receive an allocation

What’s the minimum allocation that you will assign me?

$10,000 is the minimum allocation that you will receive.

Am I guaranteed to receive an allocation?

TopTradr is a meritocracy. Only the best, profitable traders receive allocations.

What do I have to do to receive an allocation?

You need to have a TopTradr account and live trading account at STO. After that, all you need to do is trade the forex market profitably. Trading allocations at STO occur automatically and are paid out automatically.

How are TopTradr points awarded?

The exact formula is not publicly shared to avoid traders trying to game the system. That said, the allocation rules are very straight forward. You need to be profitable. You need to be consistent. Would you want to invest in you? If the answer is yes, then there’s a good chance the TopTradr ranking system will award you points in proportion to your talent.

Here are some specifics on how to maximize your chances of winning an allocation.

You need to be positive on the period to have a score above 100.

For each trade you get points based on the % returns of the trade and the risk / reward of that trade. If the drawdown is 10pts and you get 100pts out of the trade, you get a lot of points. If you get 100pts but have 500pts of drawdown, the trade will score much lower.

The sum of your points is then factored by the consistency of your daily equity growth. If you are up one day 10% then down 20% then up 30% and are not consistent, this factor will be low. If you do 2% everyday, then this factor will be high

Click here to register for a TopTradr account right now. It’s completely free to enter and you’ll automatically be graded for a possible allocation.

When you trade, whether it’s the EURUSD pair or Gold or any other asset, there is a certain spiral-like cycle, with constant contraction and expansion. Identifying the waves of contraction and expansion is a powerful tool that lets you identify long term trends and trade them effectively. The key to understanding contraction and expansion rests with one of the most popular tools in the world of trading—Fibonacci retracement.

The concept of contraction and expansion is simple; each wave of price movement is either an expansion of price range or a contraction of the wave before it. An expansion is a bullish sign, with prices expanding upward, while a contraction is a bearish sign, with prices contracting downward. 50% of the Fibonacci retracement of each wave compared with the next allows us to compare how each wave is stacked against the other, i.e. wider (expanding) or narrower (contracting). And this allows us to ultimately decide the price pattern we are looking at, either as a contracting spiral or an expanding one. Notice that, here, we do not use the Fibonacci as an indicator to forecast possible corrections but to measure the size of each wave.

As seen below in the EURUSD chart, we have stretched a Fibonacci retracement from the bottom of each wave to the top and left only the 50% level. The rule of thumb is simple; we compare the 50% level of each wave to the one before and the one after. If the 50% of the wave is higher than the one before, this is an expansion. If we look closely and stretch a line from all the 50% levels, we can see some sort of a spiral shape which, in this case, is a contracting spiral.

Trade the Spirals

So how would one use spirals of contraction and expansion? It can either be used as a contrarian tool or as a validation tool.

The contrarian use of spirals is simple and perhaps the most effective. Looking at the sample above, we can see that the 50% level of the third wave is suddenly below the 50% Fibonacci of the second wave. That is a signal that a contracting spiral is forming. When it comes in conjunction with an overbought signal from an oscillator that is an even more powerful sign. The power of the contracting and expanding spiral in that once you get the signal early on before most of the long term move starts.

The use of spiral waves as a validation tool is a bit trickier. Suppose you are planning a buy strategy for a long duration but the Fibonacci lineup points to a contracting spiral; this is a warning sign that you might be taking the wrong direction. On the other hand, if you are planning a buy strategy and the Fibonacci lineup suggests an expanding spiral(bullish) that is already mid-way and started a few waves ago, there is no guarantee that the next wave will signal the end of the trend.

The Bottom Line

Spirals is a very powerful tool for long term trades. As always, it is advised to use spirals alongside an oscillator and other indicators in order to better time your trade. Certainly, if you’re planning a multi-week trade, having spirals in your toolbox is a smart move. However, there is one caveat. As you may have noticed, identifying contracting and expanding spirals is most effective early, when you can identify the start of the spiral. It allows you to figure the direction and the strength because when a spiral starts usually a prolonged move is in the cards. But where spirals fail is that you never know exactly when the spiral will end and for that you must be prepared with other sets of indicators.

Leicester City started the 2015 season with terrible odds of winning the Premier League Championship. Bookmakers only game them odds of 5,000:1 of winning.

To put that in context, you are more likely to die riding a bicycle than you were to win a bet on Leicester City. Or, you can think of betting on Leicester City every year. If you bet on them every single year for 5,000 years, you would expect them to win a grand total of… once.

2014 was hardly an indicator of their pending success. They were nearly relegated to a lower division (i.e., kicked out of the Premier League). And yet, they did win the championship last year.

Leicester City’s Biggest Fan

Meet John Michklethwait. He’s the former editor-in-cheif at The Economist and he’s currently editor-in-chief for Bloomberg. Clearly, he’s a very smart man. And yet, despite the odds and repeated disappointments, John bet on his old love, Leicester City, every single year dating back to the 1980s. That’s roughly 30 years of nonstop losing.

It wasn’t a lot of money each year: just £20. We all have our indulgences. I see the value of having skin in the game. £20 on a season is enough to make one care, but not so much that he’s upset about losing it.

Then something disruptive happened. John moved to the US last year for his position at Bloomberg. The chaos of the move threw him out of sorts, and he accidentally forgot to bet on Leicester City in 2015. He bet on them every single year dating back nearly 30 years. And yet the one year that he forgets to bet, not only did Leicester City win, but the bet paid out 5,000:1.

Let’s step back and calculate the cost of that oversight for Mr. Micklethwait.

£20 * 5,000 = £100,000.

A hundred… thousand… pounds. That kind of winning would put a nice dent in your mortgage, wouldn’t it?

The risk of low probability strategies

Everyone hears anecdotes about successful trend traders. Even winning only 30-40% of the time, they walk away big winners over time.

You live HERE. Math isn’t good enough. You also need to wonder if your strategy can handle real-world problems.

What if they took that even lower? They could move their stop losses closer to the market. They’d reduce the size of the average loser, but the winning percentage might also drop to 10-20%.

Mathematically, this could work out identically. 30% winners that earn 5x the average loser make for a profit factor of 1.5. A strategy with only 10% winners that make 15x the typical loser also have a 1.5 profit factor.

Mathematically, this could work out identically. 30% winners that earn 5x the average loser make for a profit factor of 1.5. A strategy with only 10% winners that make 15x the typical loser also have a 1.5 profit factor.

They’re the same. Aren’t they?

Planet Earth isn’t the same as planet Math. In the real world, people get sick and miss trades. Or, they move across the Atlantic and forget to place a £20 bet.

People move. They get sick. Computers break. Things can and will go wrong with trading.

Richard Dennis once commented that the Turtle Traders would often make their annual returns off of one, single trade. A single trade!

When your performance depends on positive outliers, you’re massively vulnerable to accidents. What happens if you’re sick that day? Or your internet goes down? Or your broker locks you out of your account on the worst possible day?

Life happens, brother. A plan that depends on perfection is no plan at all. You need to make yourself robust to failure. Or even better, you’d make yourself antifragile.

Winning percentages

I mentioned that you can do really well winning 30-40% of time. Why then, does my own trading strategy, Dominari, win 68% of the time?

Because I’m exploiting compound, exponential growth. It’s not just how much you win, but the order in which you win it.

Let’s take two examples:

A ranging strategy with a profit factor of 1.3 that wins 68% of the time.

A trending strategy with a profit factor of 1.3 that wins 30% of the time.

Look at the red circles. Trending strategies are prone to extreme outcomes, both positive and negative.

Each strategy risks about 1% on any given trade. And, the average of the range and trend strategies are identical in the long run.

But… and this is an important “but”, the expected worst case scenario with the trending strategy is substantially more likely compared to the range trading strategy. In effect, the average is more average with a ranging strategy than with a trending strategy.

Why is that? Because unusual losing streaks are devastating to trending strategies. Have you ever had a losing streak? It happens to everyone.

By using a strategy with a higher winning percentage, you’re making yourself robust to streaks of losers. And, not to mention, your average length of a winning streak is considerably higher.

Even though you’re getting the same mathematical outcome, you’re making things much easier on your trading psychology when you adopt a strategy with a higher winning percentage.

Dominari & Exponential Growth

You may have thought to yourself, “68%? That’s kind of a strange number to pick.”

You’d be right. The choice of 68% winners was not a coincidence. It is, in fact, the win rate on my Dominari strategy.

Dominari is about more than just buying and selling. Trading is also about managing a portfolio and position sizing. Position sizing is phenomenally important over your trading career.

My backtest results for Dominari show that for every $2,500, the account increased to $17,855.35 after 3 years. That kind of compound growth doesn’t happen by accident. That’s why I’d like to share the good news with you in my webinar this week.

I’m going to show you how to put that exponential awesomeness to work in your trading account. Sound good? Click here to register for the FREE webinar.

Behavioural finance is a field that aims to combine behavioral and psychological theory with economics and finance to provide explanations for why people make irrational financial decisions. Therefore, findings in the field of behavioural finance can be very valuable to those who actively trade the financial markets.

In this post, you will be introduced to 5 behavioural biases you should be aware of to become a better trader.

Overconfidence

Overconfidence, in behavioural finance, refers to being overconfident in the information we base our trading decision on and being overconfident in our ability to digest and act on that information. Overconfidence has the tendency to lead to traders putting on riskier trades than one should, especially after having generated several winning trades in a row. It can also lead to traders not diversifying their investment portfolio enough. Be humble, respect the market and double check the sources of the information that you base your trading decisions on.

Mental accounting

Mental accounting refers to people treating money differently depending on how they earned it and which accounts they hold it in. For example, people tend to take higher risks with their trading profits than with their initial investment capital. It is important to become aware if you do this also, as there is no reason to treat money any differently whether you earned it at your day job, received it in the form of an inheritance, won it at the casino or generated it through profitable trading.

Don’t take more risk just because you didn’t ‘work hard for that money’.

Anchoring

Anchoring is another common behavioural bias in the investment world. Anchoring refers to traders basing their trading decision on irrelevant data or statistics, which are easily anchored into one’s mind. An example would be to say “I will sell my S&P500 ETF once the S&P Index hits 2,500” or to believe that a stock will surpass its recent all time high because you see this price as an anchor.

It is important to become conscious of anchors you personally create when it comes to trading. Only make trading decision on relevant data from trusted sources.

According to Mark Priest, Head of Index & Equity Market Making at ETX Capital, “loss-aversion bias in forex trading can be a tricky to overcome. We easily get attached to a losing trade, which we believe will end up in the green. However, it is often better to cut losing trades and place that money into a more profitable trade and make back your losses that way.”

Herd mentality

Herd mentality, ‘herding’ or ‘following the crowd’ refers to putting your money into securities or sectors because ‘everyone’ is doing so. Herd mentality often occurs during a financial crisis or, conversely, when certain stocks or sectors have become ‘hot’ and receive a lot of media attention. However, at that point the ‘smart money’ has already invested and is waiting for more people to pill into the investment so that they can sell at a large profit. If you are ‘late to the party’ to due falling victim to herd mentality you can easily make a substantial loss once the ‘smart money’ sells and the investment goes south.

Hence, choose your investments wisely and not based on the media hype around a certain stock or sector. Once an investment hits the media spotlight it is usually too late to invest and it will most likely soon go the other way.

Understanding the various types of candlesticks is one of the first things every novice trader should learn. But the experienced trader should also never forget the candlesticks’ significance. Because sometimes, when you have to figure out what’s about to happen with a certain pair and all other indicators fail, it’s the basics of reading candlesticks that can save the day—just like a sailor who navigates using the North Star when all else fails.

But even when you’re not in the unknown, reading candlestick shapes well lets you figure out the immediate trend quickly and can save time in the long run. So, regardless of your level of trading experience, here are three candlesticks every trader should know.

Hammer Candlesticks

A hammer candlestick, as its name suggests, has a hammer-like form, with the opening and closing price rather close, and the lower shade (or upper shade if it’s a reverse hammer candlestick) substantially long.

What a hammer signals is a change of momentum. If we examine the bearish hammer, we can see the candlestick’s closing price substantially lower than the highest point. That suggests that selling pressure has been so strong that it pushed for a close that is way below the high; in other words, the sellers have the upper hand. And vice versa for a bullish hammer where the momentum is set to turn bullish from bearish.

Note that each hammer type has a stronger version which suggests the change in momentum will be stronger. If we’re on a bullish trend and the next candlestick is a hammer, where the closing price is not only much lower than the highest price for the candlestick but lower than the opening, then it suggests a much stronger change in momentum.

Nevertheless, the greatest determinant in assessing the strength of the rebound to follow is the shade. The longer the shade of the candlestick compared to the rest of the candlestick, the stronger the change in momentum expected.But on the flipside, beware if the shade is relatively short; the change in momentum might be unreliable.

Doji Candlesticks

A Doji candlestick is a candlestick where the opening price and the closing price are so close they almost align. There are several variations of the Doji candlestick, but these three are the most noteworthy.

The Standard Doji – The standard Doji candlestick is similar to the general description above, with the opening and closing price aligned (or almost aligned) and the two shades sticking out. What a standard Doji implies is a stalemate between the buyers and the sellers at the opening/closing price. When it comes after a certain trend, down or up, it suggests a pause, and could imply either a resumption of the trend or a change in trend. But that’s not all. Compared to the other two, the standard Doji has a relatively short shade on both sides and that suggests a weaker momentum.

Long Legged Doji – This is perhaps the most interesting Doji candlestick. Just like the standard Doji, the opening and closing price align almost perfectly. But unlike the standard Doji, the shades on both sides are much longer. What it means is that, just like the standard Doji, there is a stalemate between the sellers and the buyers at the opening/closing price. However, unlike the standard Doji, the long shades imply high volatility around the stalemate area. This means that once the stalemate is broken, we can expect a burst of momentum because volatility is high.

Dragonfly Doji – The somewhat exotic name for this candlestick type is a bit misleading. With a long low shadow, the Dragonfly tends to have the same meaning as the aforementioned Long Legged Doji, albeit with a weaker momentum. Because, otherwise, it would be a hammer with a closing price higher than the opening price. (The Gravestone Doji is a reversed Dragonfly Doji, with the same meaning as a bearish hammer and hence only worth this brief mention.)

Engulfing Candlesticks

The engulfing candlestick truly lives up to its name. The candlestick can exist in two forms—a bullish engulfing candlestick and a bearish engulfing candlestick.

The engulfing candlestick’s clearest distinction is that it engulfs in size the aforementioned candlesticks.

A bullish candlestick will have either a lower opening price than the closing of the previous candlestick or the same price as the previous candlestick closing price but a lower low. But more importantly, the closing price of the bullish engulfing candle is a much higher high. The bearish engulfing candlestick, as illustrated below, is the exact mirror of the bullish engulfing candlestick.

What does an engulfing candlestick signal? A start of a strong trend. Bearish or bullish, when you encounter an engulfing candlestick you should expect a strong move which can be beneficial for momentum traders seeking to ride a strong trend but an engulfing candlestick can also be risky for those who have a position in the opposite direction.

In Conclusion

Obviously, understanding the various candlestick types cannot and should not replace the technical indicators. But recognizing the candlestick types does allow you to quickly figure out what’s coming next, even when in uncharted territory. When the picture cannot be completed by technical indicators, knowing the candlesticks to watch could be your guiding star.

Traders that follow one simple rule are 3.118 times more likely to be profitable 12 months later than those that don’t.

The critical feature of profitable traders is their reward to risk ratio. Yes, you’ve probably read that before, but this time it’s backed up with research. FXCM studied 43 million real trades from traders around the world to produce this analysis.

Image credit: DailyFX

Everyone “knows” that 90-95% of traders lose money. The good news is that the real percentage is noticeably lower. 83% of all traders lose money. And, that’s among the worst group. When traders use a reward to risk ratio of 1 or more, 50% of all traders are profitable after 12 months.

Be warned: the phrase “correlation is not causation” very much applies here. I cannot promise you that based on the data that using reward to risk ratios greater than 1 will automatically give you 50-50 odds of being profitable in the long run.

Logic, however, suggests that using good reward to risk ratios is a good idea. The advice to use reward-risk ratios above one appears in every trading book ever written for a good reason.

When traders use a reward to risk ratio of 1 or more, 50% of all traders are profitable after 12 months.

I suspect that it’s not the ratio itself that’s important. Instead, a large ratio discourages the worst mistakes that traders make.

I remember a project when I worked as a broker at FXCM. The systems desk analyzed the trades of the company’s most consistent losing traders. Perhaps taking the opposite signal of the worst traders might lead to profitable trades?

Alas, we found something far more mundane: the worst traders lose because they over-trade.

Trading costs

Think about how trading costs apply to the reward risk ratio. If you earn $2 for every $1 that you lose, it makes scalping an impossible activity

Traders using a 2:1 ratio need to use more patience. Even though FXCM offers low spreads and commissions, a 2:1 reward risk ratio implies further distances to the profit target. Longer pip distances lower the cost of every pip of profit.

Scalping

Intraday Trend Trading

Your cost as a percentage of profit in these examples are 5x higher when you scalp. That’s not good!

Holding trades with bigger profit targets minimizes the impact of trading costs. Said another way, you get to keep more pips when you win by increasing the distance of your profit target from your entry price.

The advice to use reward-risk ratios above one appears in every trading book ever written for a good reason.

Following a reward risk ratio greater than 1 naturally pushes you towards lower trading costs. Lowering your trading costs logically suggests you have a higher likelihood of long term profitability. If you want to get other critical tips for similar results, then make sure to sign up for the Foundations of Profitable Trading Checklist.

Reward risk ratio explained

The reward risk ratio compares your average profit to your average loss. If your average winning trade is $30 and your average losing trading is $15, then you have a reward risk ratio of 2:1. If your average winning trade is only $8, but your average losing trade is $16, then your reward risk ratio is 0.5:1.

Does the winning percentage matter?

Amazingly, the percentage of winning trades doesn’t seem to matter. The high frequency trading firm Virtu is a great example of this. Virtu wins on 99.999% of trading days even though it only wins on 49% of its trades.

The FXCM data shows that the average trader wins more than 50% of the time. EURUSD trades won 61% of the time, while some pairs were closer to 50%. The percentage of winning trades on all currency pairs is greater than 50%.

Image credit: DailyFX

Despite winning more than 50% of the time, trades with a poor reward risk ratio only had a 17% chance of earning a profit 12 months later.

… you get to keep more pips when you win by increasing the distance of your profit target from your entry price

If you’re currently struggling with your profitability, you’ve probably thought to yourself, “I need to win on more of my trades.” It’s like a business owner saying, “I need more customers.”

Smart business owners know that finding more customers is time consuming and expensive. It’s often much easier to sell more stuff to the customers that you already have.

It works the same way in trading. Instead of worrying about winning more often, you should focus your efforts on squeezing a few extra pips out of your winning trades.

If there’s anything that you should learn from this research, it’s this: the fastest way to improve is to earn more pips on your winning trades. You do not need more winning trades to do better.

Types of strategies with good reward risk ratios

The type of strategy that you select almost automatically dictates your reward risk ratio. Ranging strategies usually have ratios less than 1, which the FXCM data shows have a 17% likelihood of long term profitability. Trending strategies have ratios greater than 1, which have 50% probabilities of long term profitability.

Ranging strategies

If you daytrade EURUSD where the daily range has recently been around 80 pips, then that 80 pip range is the hard ceiling of what you could possibly make in a day. You know from experience that getting the bottom tick or the top tick of the day almost never happens. If you’re lucky, you may enter within 10-20 ticks from the bottom.

Upon entry, you also need to give the trade breathing room. That stop loss probably needs to be something like 25 pips if it’s a tight stop or 40 pips in order to have plenty of breathing room.

The best exits in a ranging market occur in the middle. You don’t know if the market will push back to its ceiling. It has just as much chance as going back to support and it does up to resistance.

The mid point of an 80 pip range is 40 pips, but you’re likely entering 10-20 pips from the true bottom. That only gives you a potential range of profit targets from 20-30 pips.

The most realistic, good ratio is a 30 pip profit target on a 25 pip stop loss, which is 1.2. Most strategies will probably risk 40 pips to make 20, which is a ratio of only 0.67.

Consider what a range trading strategy is. The market is stuck. It’s having a hard time going anywhere. You should only range trade if you have a well researched strategy with a long term edge. Otherwise, the typical trader is 83% likely to walk away with losses after a year.

Trending strategies

Trend trading strategies should last for weeks or months at a time. Looking again at EURUSD on a multi-month time frame, the current long term range is from 1.05 up to 1.16. That’s a range of 900 pips, but it’s not like the market wobbles up and down through that range. Instead, it gets stuck near 108, then briefly pushes down. It comes back to 1.08, then pushes up to 1.12. It might push up again to 1.15, then trade back down to 1.08. It’s hard to guess whether the next move will be up or down.

A 3,498.4 pip move in the EURUSD over a 10 month period.

Better long term plays are to sit on trades and let them pick a direction. The best recent EURUSD example began on May 8, 2014 at 1.39934 and ended March 13, 2015, at 1.04946. That’s a colossal 3,498.4 pip move in just 10 months.

Is there a scenario where you’ll risk almost 4,000 pips on a trade? Of course not. What about 1,000? No! What about 500? No!

The natural risk reward ratio for these types of trends is astronomically high. For a few hundred pips of risk, you can make 10 or more pips for every one risked.

As long as you’re not aggressively trading, trending strategies are far more difficult to mess up. If you can click a button, enter a stop loss and then do nothing for months at a time, then you’re qualified to consider trend trading.

The practical application is of course more difficult than that description, but that’s the idea in a nutshell. If you’re a newbie forex trader and wondering where to start, long term trends are the place where you’re less likely to get hurt.

The problem for newbies, though, is that they’re looking for excitement. It’s not terribly exciting to place on trade and then do nothing for months. It’s one of the paradoxes of the market that less work can often lead to better results.

How to improve your trading

The reward to risk ratio is a critical element for new traders to increase their chances of success, but it’s not the only one. Click here to register for our free Foundations of Profitable Trading Checklist. You’ll learn simple, but useful, tips to improve your trading.